Key headings in an agreement between hotel owner and operator: term, management fees, budget approval, performance measures and termination.
The owner of a hotel and the party that runs it are not always the same. Particularly where an investor has no experience of hotel operation, the property may be entrusted to an operator or a hotel chain under a management agreement. Under such an agreement the operator runs the hotel on behalf of and for the account of the owner, while ownership of the property and the business risk generally remain with the owner. Below we outline the main headings of these long-term, multi-layered agreements.
Nature and term of the agreement
Under Turkish law a hotel management agreement is regarded as an innominate contract, assessed in the light of the general provisions of the Turkish Code of Obligations No. 6098 and the rules on contracts of mandate. Such agreements are usually concluded for a long term and often include options to extend on certain conditions. It is important that the term fits the financing structure of the property and the investor’s exit plans.
Management fees
The operator’s remuneration usually consists of several elements. Structures seen in practice include:
- A base management fee calculated on gross revenue
- An incentive fee linked to operating profit
- For branded hotels, contributions for the brand, reservation system and marketing
- A separate fee for pre-opening services
The revenue and expense definitions on which these fees are calculated are among the most heavily negotiated parts of the agreement. Clear and consistent definitions reduce the risk of later accounting disputes.
Budgets, reporting and owner oversight
Each year the operator prepares an operating budget and a capital expenditure plan. The agreement states whether these budgets require the owner’s approval and which budget applies if approval is withheld. Regular financial reporting, an independent audit and a right to be consulted on major decisions all strengthen the owner’s oversight of the business.
Performance measures
Many agreements include a test for measuring the operator’s performance. It may be based, for example, on the hotel’s revenue indicators falling behind those of a competitive set of comparable properties over a given period. Whether the owner is given a right to terminate if the test is not met, and whether the operator may cure the shortfall by making a payment, are frequently negotiated points.
Staff, licences and permits
Who will be the employer of the hotel staff, what happens to employees when the agreement ends and how employment-law obligations are shared should all be addressed separately. In whose name permits such as the tourism operation certificate under the Tourism Encouragement Law No. 2634 and the business licence will be obtained and maintained is another heading the agreement should cover.
Termination and transfer
The circumstances in which the agreement may be terminated, whether it passes to a new owner if the property is sold, and how the operator will hand over brand elements, systems and data are decisive at the exit stage. If arbitration is chosen as the method of dispute resolution, the seat and the applicable rules should be clearly specified.
In short
A hotel management agreement is a long-term relationship in which the owner retains ownership while entrusting the business to another party. The term, fee structure, budget approval, performance measures, staffing and permits, and termination provisions form its backbone. As every property and operator is different, the text should be assessed against the specific investment structure.
This content is for general information only and does not constitute legal advice.